Is Powell’s Confidence Shared by the Rest of the FOMC?March 17, 2022
While many commentators scratched their heads at the Fed’s latest summary of economic projections (SEP), the market took its cue from Chairman Powell’s suggestion the US economy can withstand a barrage of rate increases this year without negatively impacting growth.
In addition to the SEP, the Fed also provides more granular data about the projections contained in the SEP that never seem to get much attention. What can we divine from this data that confirms or contradicts what was said in the press conference yesterday?
For starters, for a Fed so confident in the growth trajectory of US economic growth, it is a little surprising to see five more members express a concern about the downside risks of economic growth, while none expressed a concern about the upside to the possibility of growth. For what many characterized as a “hawkish” meeting, it seems more than half the Federal Open Market Committee see growth risks to the downside.
This body language would seem to undermine Powell’s confidence in the resilience of growth in the face of likely 6+ rate hikes this year.
But, this fits with the Fed’s assessment of the risks to unemployment. Here again, about half the committee believe upside risks to unemployment exist and not a single member is concerned about downside risks to unemployment.
Next, it is clear the Fed is laser focused on addressing inflation. Every member of the FOMC saw risks to the upside in the PCE Price index.
Same goes for the core PCE Price Index, where all members see risks tilted to the upside.
So, when we round up these data points, I think it is pretty clear that:
- -The Fed is almost singularly focused on inflation, with a high level of conviction that the risks to inflation are on the upside. I think this buries the idea of transitory.
- -Despite Powell’s reassurance that the economy is strong enough to withstand 6+ anticipated rate increases this year, his opinion does not seem to be shared by the majority of the FOMC. There seems to be a growing concern among half of the FOMC that the combination of declining growth estimates for 2022, combined with soaring commodity prices and fiscal austerity, on top of 6+ rate hikes may too much for the economy to bear. Further reflecting this skepticism, the Fed marked down its 2022 GDP estimate to 2.8%, or 75bps below the Bloomberg consensus.
This confluence of data points to a Fed that is worrying more and more about growth in 2022, but are setting expectations for a more aggressive rate hiking cycle. Something is going to have to give.